Just what is the 'fiscal cliff'?

As the presidential election came to a close and America's focus shifted towards the future, questions have arisen about the state of the economy as Obama begins his second term. One of the most commonly used terms in headlines since the election has been “fiscal cliff,” referring to the current economic situation. But what does this mean and why has the fiscal cliff become a focal point of post-election conversations?

Courtesy of Tomasz Sienicki © 2003/ Wikimedia Commons

CNNMoney says the fiscal cliff is a “man-made disaster waiting to happen.” In other words, starting Jan. 1, the U.S. could potentially plunge back into a recession. This recession would be a result of the seven trillion dollars of tax increases and spending cuts that are anticipated as a part of President Obama’s economic strategy. Avoiding the fiscal cliff will be a task that the President and Congress have to take on as soon as possible, and in order to do so there are many factors to be considered.

Spending cuts will be directed towards defense and nondefense budgets. $55 billion of cuts in both sectors will be part of the projected 10-year decrease in spending per the Budget Control Act. First and foremost, the tax increases will stem from the expiration of the Bush tax cuts on Dec. 31.

Additionally, the already expired Alternative Minimum Tax will lead to four million more people subjected to the “wealth” tax. Expiration of the payroll tax holiday, the federal extension of unemployment benefits, and tax breaks on some small business models are also included in the cuts that contribute to the fiscal cliff.

Courtesy of Wikimedia Commons

According to CNN representatives Ali Velshi and Christine Romans, the fiscal cliff could lead to a loss of roughly one million jobs over the next two years and a significant decrease in GDP. With these possible repercussions of an underdeveloped economic strategy, some studies have suggested a comprehensive approach to eliminating the fiscal cliff.

The Huffington Post gives a possible solution of combining the economic strategies of the Bush years with those of President Obama. According to a study of the Bush tax cuts, Obama’s payroll tax cuts and Obama's jobless benefits, extending one or the other's strategy might not be entirely effective, but extending both simultaneously could lead to a two to three percent increase in U.S. GDP.

As President Obama takes office once again, Americans will be anxious to see how he approaches the cliff. If he sticks to his campaign policies, succumbing to the looming fiscal cliff will likely become a reality.

According to The Washington Post, Democrats see advantages to “going over the cliff,” including the ability to establish tax cuts for the middle class in the future. In this case, future revenues will establish a more “balanced approach” to debt reduction.

If, on the other hand, Obama chooses to alter his economic strategy and extend tax cuts in January, Americans will see an immediate increase in revenues. The fiscal cliff is an economic quagmire that could lead the U.S. into another downward spiral.  Fortunately, with the right governmental policies it seems possible that the cliff can either be avoided or at least the fall softened.

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